Several days before Thursday’s FOMC meeting, we asked rhetorically whether “Yellen is about to shock everyone“, and lo and behold: everyone was quite “shocked” when instead of a hawkish hold or a dovish hike, Yellen proceeded with the loosest possible decision: keeping ZIRP indefinitely, crushing both the Fed’s credibility and its market “communication” strategy in the process, and sending the market tumbling. That said, not everyone was shocked – as we also reported one bank made the explicit case not only for no rate hike but for further easing – as first reported here last weekend, “Goldman said The “Fed Should Think About Easing.”
This is what we added last weekend:
What one should most certainly pay attention to, however, is what Goldman says the Fed will do – you know, for “risk management” purposes – because as we have shown countless times in the past,Goldman runs the Fed.
As such, forget a September rate hike. Or perhaps Yellen will listen too carefully to Hatzius and instead of a rate hike, shock absolutely everyone, and instead of a rate hike the Fed will join the ECB, SNB and Riksbank in the twilight zone of negative rates. That, or QE4.
And why not: after both the Swiss National Bank and the Chinese central bank crushed investors who thought the banks would never surprise them, why should the Fed not complete the 2015 trifecta of central bank turmoil? After all, the money printers are already running on “faith” and credibility fumes. Might as well go out with a bang.
Not only is this precisely what happened (yes, the Fed gave its first ever NIRP hint ever) but more importantly, we got the latest confirmation that when it comes to policy, anything that Goldman wants, Goldman gets courtesy of a few clueless lifetime academics in charge of the US money printer.
With that out of the way, the only question that remains is not what will the Fed do, but what Goldman tells the Fed to do in 2015, or rather in 2016, because according to Jan Hatzius’ latest note, one can forget about a hike in October or December, and instead focus on 2016, or rather the summer of 2016.
For the answer, we go straight to Goldman which in a rhetorical Q&A wonders “What were the most important things you learned from this week’s FOMC meeting?” to which the answer is “Mostly, the FOMC confirmed what we already knew.”
Well, duh, the Fed merely read the script Goldman bad prepared – of course what the Fed confirmed what Goldman already knew. Although to keep appearances, even Hatzius had to pretend he was surprised:
That said, there were some surprises at the margin. The statement was even more dovish than we expected, especially with respect to global growth. And while both the committee’s economic projections and the median funds rate path were in line with our forecasts, several members—possibly including Chair Yellen—seem to have reduced the projected speed of hikes in 2016 from 100 basis points (bp) to 75bp. But overall, we think the basic message is intact, and the surprises at this meeting were much smaller than back in June, when we shifted our liftoff call from September to December.
Uh, as a reminder, Goldman said “the Fed should think about easing.” How on earth can it be surprised by a “more dovish Fed”, but yes, yes, we get that admission the Fed is controlled by Goldman destroys the narrative there are these “tinfoil conspiracy websites” who should be ignored because they allege just that.
In any event, here is Goldman’s explanation when it would consider greenlighting a Fed rate hike:
Q: Is October on the table?
A: Not really. We believe that Chair Yellen’s baseline since the June meeting has been a December liftoff, and it would be very unnatural for her to pull forward given the information received in the meantime. Besides, there is only one round of monthly economic data on the calendar before then. Last but not least, the logistics are daunting. There will not be a fresh SEP, and the committee would need to announce an impromptu press conference in the October 29 FOMC statement announcing the rate hike itself; an earlier addition of a press conference to the calendar does not work because this would lead the market to conclude that the FOMC has decided to hike, without any room for explanation at that point. This all seems too sudden and dramatic for a Committee that, we think, would like the first hike to be as unexciting as possible.
Q: What could shift the liftoff into 2016?
A: Although we expect the conditions for liftoff regarding employment, inflation, and financial conditions to be in place by December, there is some risk of disappointment in each of them. Missing on any one of them would call December into question, missing on more than one would almost certainly shift liftoff into 2016. Regarding growth and employment, the data looked quite solid until recently but the early information for September has been weak so far. As shown in Exhibit 1, the average of the New York Empire State and Philly Fed index in September fell to the lowest level since the 2011 recession scare, and consumer sentiment also weakened significantly. These are all volatile indicators that could bounce back quickly, but we would put at least a bit of weight on the possibility that they indicate a larger-than-expected drag from the recent tightening in financial conditions and the weakness in global growth.
Finally, regarding financial conditions, our baseline expectation is an easing but the uncertainty is significant as always. And at least so far, the response of the financial markets to the FOMC—especially the sharp selloff in the stock market—has probably disappointed the committee’s expectations.
The punchline: Goldman no longer wants a 2015 rate hike, in fact any rate hike if it ever comes, will be in the summer of 2016:
Q: What is your own view of the appropriate liftoff date?
A: Our own answer to that question has long been 2016. In fact, our own view is similar to that of Chicago Fed President Charles Evans, who recently shifted his call from early 2016 to mid-2016. Although it is definitely possible to rationalize a December 2015 liftoff using various forms of the Taylor rule, there are two good reasons to delay the move longer. First, the risk of hiking too early is bigger than the risk of hiking too late when inflation is so far below target and we have spent so much time stuck at the zero bound. Second, we have seen a sizeable tightening of financial conditions. At this point, our “GSFCI Taylor rule” suggests that the FOMC should be trying to ease rather than tighten financial conditions. Our own view in terms of optimal policy is quite strongly in favor of waiting well into 2016.
And there you have it: no rate hike until mid-2016, which as we said previously, means no rate hike at all since the “apolitical” Fed will never hike just before a presidential election, and more importantly, by then the epic inventory liquidation-driven recession will have already started, making the only question that matters in the summer of 2016: NIRP or QE4. Everything else is noise.